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January 23, 2006

For those of you of a conservative/libertarian slant, a serious question. We all know that Social Security is a flawed system that currently pays very little, and without reforms to either decrease benefits or increase taxes, is doomed to bankrupt our country.

So the question: Do you trust President Bush to “privatize” the system?

If so, I’ve got a few words for you. Medicare Part D. It’s quite possibly the most flawed model of an entitlement program that our government has ever created. At the very least, I can say it’s probably the worst of my lifetime. It is confusing, and while complex programs probably are, it’s at the same time nonsensical. It fails to take advantage of the possible cost savings of bulk purchasing, and may end up costing $1 TRILLION over the next ten years, with prices slated to increase quickly as the baby boomers retire.

This is what the President with a “business background” has brought us. A giveaway of our tax dollars to the major pharmaceutical companies. Looking at Medicare Part D, I can’t even think of worse ways to set up this program. It’s so poorly designed that individual states are having to pony up large sums of money to prop it up in the transition period, because nobody has a clue what’s going on.

So I don’t trust Bush one bit to “privatize” Social Security. Notice the use of quotes, as it is deliberate. President Bush doesn’t intend to allow the private sector to take over the process, he intends to federalize a portion of the private sector to administer his new bureaucracy. “Privatizing” something should mean the Federal employees become unemployed, and we all know Bush hasn’t been advocating that.

So let’s take a quick look at what Social Security Part D would look like.

First things first. You’ll never lose your benefit. No matter how badly your investments do, you’ll get a check. All it will take is for the first person to “lose” under this system and you’ll see an immediate “floor” of benefits. That floor will probably be in the range of the lower payments our current system pays out: sparse, but better than nothing. For those of you who think that if people’s investments fail they should pay the price for that, I’m sorry to say that politicians will never let that be true.

But that brings me to the second point. You won’t have freedom to invest as you see fit. It may be an account with your Social Security number on the file folder, but it’s not your property. The government isn’t going to let you day-trade it. The government probably won’t even let you pick individual stocks to invest in. At best, you’ll have your choice of certain “approved” mutual funds. If the Medicare program is any indicator, these funds will be cherry-picked by the mutual fund companies themselves, not by intelligent people based on what they believe will give them the best returns.

We can already see that government involvement will have some sort of distorting effect on the market. But how far down will this go? Well, at the beginning, companies will be clamoring to meet the requirements of the Social Security program to become an “approved” fund. After all, you’re getting a quick crack at tens of millions of investors, sure to impress your bosses (and shareholders). So what do you do to get on the “approved” list? Anything the government asks. You think the Vice Fund will be on that list? I don’t think so. But it only starts there. You can bet that the requirements the government places on funds to be on that approved list will be lengthy and will further distort the market.

All of a sudden, fund managers are no longer looking to earn the largest return, they’re looking to attract the most customers by attracting the new Social Security participants. Will getting the highest return and keeping expense ratios low drive the market? Nope, increasing expense ratios brought on by increasing costs to comply with ever-more-demanding federal regulations will be driving the market. And real rates of return “within the system” will fall.

Now fast forward 20-30 years. How much money is now invested in accounts “within the system” compared to those outside the system? When the feds change a regulation, or change their list of approved funds, how much money moves all at once? When the feds all of a sudden decide that too many Americans are overweight and certain fast food companies can’t be invested in, how quickly do you see McDonald’s posting record losses and Subway posting record gains?

The Bush plan to “privatize” Social Security won’t get the government out of our retirement planning, it will push them deeper and deeper into it. Considering how well they’ve done with most of their other programs, I don’t want that to happen.

3 Comments

Short answer: No. I don’t trust them to do a single government shrinking thing. I believe that if this administration does something in accordance with the small-government agenda of most GOP voters, it is incidental. Or accidental.

Have you watched “The Presidents” on the History Channel? Every one of those guys who sold the country (and genuinely believed) in smaller government before going into office increased the size of government while he was in, bar none.

There’s a real ugly potential from this line from your post:

“You wonâ€™t have freedom to invest as you see fit. It may be an account with your Social Security number on the file folder, but itâ€™s not your property. The government isnâ€™t going to let you day-trade it. The government probably wonâ€™t even let you pick individual stocks to invest in. At best, youâ€™ll have your choice of certain â€œapprovedâ€ mutual funds.”

Everyone with an ounce of smarts will choose the option with the most risk, even if it is an index fund representing the whole market, and no matter at what age they enter. The potential shortfalls of return could be a lot worse than merely overpromising and underdelivering with our current system.

I’m hoping for a do-nothing approach and a system-wide collapse that includes widespread social unrest. Now there’s something you’ll pay to see on television!

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